Timing right for Scottish engineering group Weir to expand in the UAE

Weir Group’s expansion in this country is a good indicator of what is going on the oil business globally.

The Scottish engineering group has been among those hardest hit by the oil price crash, seeing its share price plummet by about 60 per cent since September last year to 1,114 pence on at the close in London on Tuesday, a decline that has been common for its peers in the languishing oil services sector.

“In my career I have seen three downturns and this is the worst of the lot,” says Vikas Handa, Weir Group’s top man for the eastern region, which spans the Middle East, Africa and Asia.

The cycles in the mining and the oil and gas sectors, for which Weir provides a variety of engineering services, have tended to move in opposite directions, typically providing the company a buffer when one or other sector is hit.

“But this is the first time both are down at the same time and that has hit us more than in previous downturns,” says Mr Handa.

In a bid to cut costs and weather the downturn, Weir Group this month said it would be cutting another 400 jobs to bring total cost savings this year to £110 million (Dh608.9m), with the company’s chief executive Keith Cochrane warning that there would probably be worse to come in the final three months of the year.

So, why is the company now expanding significantly at the Jebel Ali Free Zone (Jafza), where its new 25,000 square metre engineering plant will employ about 250 people, nearly tripling its UAE workforce?

“As a company we are making decisions on a long-term basis and we know the cycle is going to turn up again so this plant is built to cater to the market for the next 25 years,” says Mr Handa.

Weir has a smaller facility in Jafza and the expansion plant will be located in the new Jafza south area. It will make parts that include the “Christmas tree” pump and valve contraptions that sit on top of all oil or gas wellheads, and Mr Handa says the plant will be the first in the region with this manufacturing capability.

It has been a long time coming – the factory was first announced four years ago to coincide with a visit to the UAE of Scotland’s then First Minister, Alex Salmond. It took the intervening period to finalise the land, build the facility, bring in new machines and tools and install and commission the plant. Indeed, Mr Handa says, Weir searched in vain for plant space closer to its existing facility and saw no evidence of excess capacity at Jafza or of soft rents.

“It is a huge, purpose built, one-of-a-kind facility with latest machines making it one of the largest plants in the region,” says Mr Handa, who expects it to be fully operational early next year.

With a degree of bitter irony, the plant opening comes immediately in the wake of Weir’s reporting a year-on-year decline of 58 per cent in orders at its oil and gas division in the third quarter.

That was put down mostly to the tough conditions in Weir’s North American operations, reflected in the loss there of 140 jobs, as the shale oil and gas bubble deflated.

The company’s headcount in the North American market has declined by 37 per cent in the past year and hundreds of jobs in the mining division also have been lost, mainly in Africa.

Mr Cochrane told shareholders this month it was the worst commodities downturn he had seen in three decades but he put a brave face on it. “We’re putting more focus on research and development and on technology innovation in particular, because I want to make sure we emerge stronger from this downturn than we entered,” he told shareholders.

So, why would this be the right time to expand capacity in the Middle East?

“People say you got the timing wrong because the market is down,” says Mr Handa. “I say we got it the other way around: if I didn’t have the plant I wouldn’t be able to meet growing customers’ demand. Our labour costs in Dubai are one-third that in the US or Europe.”

Why, in that case, didn’t Weir expand sooner in Dubai?

“Because we could still maintain market share while manufacturing elsewhere and the business was more US-centric,” so manufacturing was based mainly in Houston, Texas,” he says.

The other factor, of course, is that the industry has gone from one that was seeing chronic inflation to one seeing heavy downward pressure on costs, not least from the regional national oil companies that are demanding price cuts on supply and service contracts.

The Abu Dhabi National Oil Company and its various divisions have all indicated that they are looking for cuts in the order of 25 per cent.

“The 25 per cent target is very realistic,” says Mr Handa. “We are definitely discounting by that much because we have the spare capacity. The strategy for the oil companies is to capitalise on the oversupply and re-tender contracts and ask for discounts. They have to anyway as oil prices are down so much.”

The expansion of Dubai and contraction of North America can also be seen as vindication of the Saudi Arabia-led strategy that has been in place now for a year – to force higher-cost oil suppliers to reduce their output at a time of oversupply rather than the old policy of letting the lower cost producers in the Arabian Gulf curtail output to balance the market.

If the downturn forces a shift of production in the engineering facilities and jobs to the region that would underline the economic efficacy of the policy.

“I’m very pleased to be in this market in the Middle East,” says Mr Handa. “Even in the last downturn, nobody reduced headcount,” and Weir’s overall employment in the region had grown to 1,500 in the region even before the new Dubai plant.

Interestingly, though, whereas employment of locals in the sector has tended to be relatively high in other countries – for example, 50 per cent in Iraq and 95 per cent in Azerbaijan – it is virtually non-existent in the UAE.

“In manufacturing there just isn’t the available labour pool,” says Mr Handa, adding that most of Weir’s plant operatives come from the Indian sub-continent.